Limiting banks’ capacity towards settlements

According to the latest instructions of the State Bank, financial institutions have been barred from carrying out settlements with defaulters without obtaining a No-Objection Certificates (NOCs) from the Chairman, National Accountability Bureau (NAB). As per this directive, while requesting the Governor, SBP for a reference against wilful defaulters, financial institutions would be required to submit a certificate to ensure that they will not enter into settlement agreement with the borrower without a prior NOC from NAB. While issuing the circular, it has been clearly stated that it has been observed that after proceedings are initiated by NAB against defaulters, financial institutions enter into settlements without obtaining the consent of the NAB, rendering its proceedings futile and resulting into wastage of time and resources. However, subsequent to the submission of cases to the SBP that are still in the process of referring to NAB, the financial institutions, if they change their mind, will be required to first withdraw such requests/cases from SBP before entering into settlement agreements with borrowers.

The background of the new circular is said to be the present attitude of some of the bankers to bypass the earlier instructions by SBP to the financial institutions not to enter into any agreement with borrowers facing cases without prior permission/clearance from the NAB. As some of the financial institutions had failed to comply with this directive, SBP has now decided to obtain a certificate on the above lines from every financial institution at the time of a reference request. Since one of the major tasks of the SBP is to ensure the efficiency, soundness and stability of the financial institutions as well as streamline their procedures in a way which are more transparent and properly regulated, the new circular of the State Bank would help achieve these objectives and force the banks to follow an established pattern of debt settlement with borrowers whereby a written clearance letter from the Chairman, NAB has been made mandatory to proceed in the matter and withdraw the case. This would mean that banks would now have to work harder to decide whether a certain case should be forwarded for settlement/rescheduling to the SBP/NAB. This will also reduce the chances of any collusion between a defaulter and the bank staff once the case has been sent to the NAB. However, it needs to be remembered that the present system with all its faults and weaknesses was working quite effectively and there was probably no need to temper with it in one way or the other. The State Bank has been giving utmost importance to the problem of Non-Performing Loans (NPLs) and has been quite successful in its efforts. According to the latest annual report of the State Bank released a few weeks ago, the amount of Non-Performing Loans (NPLs) of all banks declined from Rs 618.2 billion at the end of December, 2012 to Rs 595.3 billion at the close of June, 2014. The ratio of Net NPLs to Net Loans declined significantly from 4.63 to 2.91 in the same period which compares very favourably with the international standards. Some analysts may argue that a sharp decline in the ratio of NPLs may be due to the vast accumulation of government paper on banks’ balance sheets but the above period also coincided with a depressed economic activity and lower industrial growth in the country which could have raised the level of NPLs. Also, we don’t see any reason to overburden the NAB with default loan cases and issuance of clearance letters in this regard when State Bank could itself take full responsibility of the subject of NPLs. If at all NAB and other law enforcing authorities had to be involved, it must be on a very selective basis. It seems that after privatisation, banks have become very prudent, in fact more conservative, in lending to the private sector and are averse to risk taking. If at all there were certain lapses of judgement or indications of dubious behaviour, State Bank itself is more than capable to handle all matters relating to NPLs. Issuance of more circulars on the subject by the SBP and increased involvement of NAB gives the impression as if the banks are undertaking a more risky business which could weaken the health of their balance sheets to a dangerous extent. Since this is not the case, there was no need for the SBP to be unduly concerned about the subject and increase the involvement of NAB. It is time for the SBP to motivate and expect the banks to be more responsible and confident in handling their affairs.